Don't Blame the ECB for Negative Rates

(Bloomberg Opinion) -- The European Central Bank has infuriated bankers because of its policy of negative interest rates. It now looks like some euro zone governments are unhappy too.

Christine Lagarde, the ECB president, would be wise to keep calm and carry on. Her bank is meant to be independent of political interference and its only objective must be to fulfill its mandate of maintaining price stability. Governments have themselves to blame for forcing the Frankfurt institution to take such drastic action: If they used fiscal policy more widely, the central bank would need fewer unorthodox measures.

The ECB charges a 0.5% fee on the excess reserves that banks park in its deposit facility. Several governments, including Belgium and the Netherlands, have complained about this policy, according to a Bloomberg News report. They fear negative rates are increasingly hitting savers and could have a damaging impact on pensions. More generally, they're worried about the risks sub-zero rates pose to the financial stability of the euro area 

These arguments aren't new. Many bankers, in Europe and the U.S., have raised concerns about the impact of negative rates on their profitability: As interest rates fall, the spread between lending and deposit rates gets ever tighter. The negative rate on excess reserves parked with the ECB is another cost. Banks have started passing sub-zero rates on to their corporate clients and wealthier customers, but until now have preferred to take a financial hit rather than charge smaller savers (though that may be changing). 

The ECB should politely tell governments to mind their own business. For a start, this is what independence is about. Politicians have shielded central bankers so they can take decisions that are good for the economy even when they're electorally unpalatable. Northern European countries are typically the strongest defenders of central bank independence. It's ironic that they're now leading the charge against the ECB.

Second, there is no evidence that negative rates are hurting the euro zone economy. The inflation rate in the single currency area is hovering around 1%, well below the ECB's target of close to, but lower than, 2%. It's right that the central bank is doing all it can to help inflation back to its objective. Savers may be feeling the pinch, but lenders are enjoying very low rates, meaning there are more opportunities to make productive investments. ECB research shows that when banks pass on negative rates to their corporate clients, the latter react by investing more.

Plus there are still few signs of risks to financial stability. If needed, euro-zone members could use their so-called “macroprudential” toolkit, which includes the power to restrict any risky lending via the imposition of higher loan-to-value ratios. The ECB isn't deaf to the complaints of banks: In September, it introduced a “tiering” system to mitigate the effect of negative rates on their profitability.

As Lagarde's predecessor Mario Draghi argued repeatedly, governments have an easy way to help the ECB end the negative-rate cycle: Use fiscal policy more smartly, so that those countries with spending room contribute more to Europe's recovery. Even better, they could take steps toward setting up a euro zone budget, which would allocate money to areas worst hit by crisis. The list of those with the fiscal power to help include some of the complaining countries, such as the Netherlands. A stimulus would also probably lift inflation back toward its target, giving the ECB freedom to raise its rates above zero sooner.

Lagarde should therefore hold her ground. If the ECB believes negative rates are becoming counter-productive, then it should change course. But if it believes they do more good than harm (as it does currently ), then it should keep them where they are — or cut them further if necessary.

It would be foolish for Lagarde to raise rates preemptively in the hope that governments will pick up the fiscal baton. The last decade has shown repeatedly that euro zone politicians often disappoint. If governments are unhappy, they should put their euros where their mouths are.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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